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I obviously don’t speak for all investors. But in my experience
as an entrepreneur, and now spending my time amongst investors, I
can generalize that almost all VC investments in early stage
technology & Internet investments come down to just four key
factors. And they’re easy to remember because they all begin with
an M: management, market, money and above all else momentum.

This post was prompted by an e-mail exchange I had with a young
entrepreneur. It’s a conversation that creeps up from
time-to-time. This person had been introduced to me several times
by angels and I was told that I’d be the perfect seed investor. I
was interested in learning more. For a combination of reasons, I
didn’t end up talking with the CEO in time and the company
quickly became over subscribed. That’s fine. It is probably the
right thing for the stage of company.

So I wrote to the entrepreneur and said, “Congrats. Now that
you’ve gotten the round done I’d love to get together at your
convenience and learn more about your business so I’ll be ready
well before you’re next fund raising event. The CEO said, “Not
taking meetings with investors for a while (hope you understand),
so lets connect again in a few months?”

I do understand. And the CEO was very polite and professional
about it. And the fault for not meeting quickly in the first
place was mine. I had been traveling.

I understand. But I disagree with the approach for most
entrepreneurs.

Not everybody agrees that entrepreneurs should take investor
meetings outside of “funding season” when they’re raising
capital. They see it as a distraction and a time-suck. I agree
that you shouldn’t take tons of meetings and not from people who
are just “fishing.” But I believe you need to identify those
investors that you think will be a good fit down the line and
start building your relationships now. Maybe this CEO doesn’t see
me as a great fit. That’s OK, too.

But if you identify investors with whom you’d like to work here’s
my advice:

1. Momentum - The number one thing that
investors get their checkbooks out is for momentum. Everyone has
their own definition of momentum (user numbers, revenue, channel
partners, biz dev deals, whatever). But the reality is that this
nebulous term people talk about that they “need to see traction”
really just means that they’re not ready to invest in your
company. Why? Chances are they don’t know you well enough and
can’t judge your performance or capabilities. Some have “rules” –
everybody breaks them for the right deal.

Imagine the “typical” deal – somebody comes into a VC’s office,
they’ve never met, they’re highly referred by a friend and
they’re pitching a product demo and a PPT. You’ve never met them
and are asked to make a judgment in 2-3 weeks because they’re
doing a road show. That might work for $50-100k but less likely
for $3m unless you’re a seasoned entrepreneur, known to the VC,
have some metrics that work in your favor or have built something
the VC believes to be truly unique. And VC’s are tough customers.
They’ve “seen it all.”

So that’s why I tell all entrepreneurs that if you
want to raise money from VCs you should see them
early. If I see your alpha product then I can
judge how it develops over time. If you have 2 developers and the
next time I see you it’s a team of 6 with a new head of products
I can see momentum. If you have beta customers, new pricing
plans, different positioning, more market insights, good press
coverage – whatever – these are all signs that the ball is moving
forward. And it is that momentum that is easier to judge
than a single data point.

Some entrepreneurs have said to me, “yeah, but then the VC sees
you when you’ve not yet matured and you set a bad initial
perception.” Not if you manage expectations. ”We know that we’re
meeting you earlier than you’d normally invest. We
therefore may not have the full progress you’d expect but we’d
like to meet you early so that when we’re at the stage you
normally invest you’d have a chance to judge our progress.”
Lowering the bar is disarming.

So imagine when the entrepreneur who “isn’t taking investor
meetings” comes back for the next funding round. It’s true that
I’ll have points A & B. But I would have missed a lot in
between. And my “point A” is only determined by what I read in
the press since we never had our initial meeting. If the company
“crushes it” and has data to prove they’re doing well I suppose
it hardly matters. But if they’re like most people it’s harder to
measure. Almost every deal I’ve ever funded I’ve gotten to
know the founders over time. I’ve talked before about
how to build long-term relationships with
VCs.

2. Management Team - This is really a sine qua non. Different VC’s have different
calibration points on the continuum of management, product or
product / market fit. I’m personally 70 percent management, 30
percent product. But for any investor it takes a miracle to get
investment dollars out of them if they’re not impressed with the
team. You will find some investors who will say to themselves,“I
could do this deal but the CEO will need to be replaced.” Sadly,
I hear that all to often. I never feel that way. If I feel a
priori that the CEO can’t cut it I’m highly unlikely to invest.

Because management is so important I always tell people to make
the bio slide the first in your deck. If you have good experience
then the VC will be leaning forward for the rest of the
presentation. If you save the punch line that you’re from the
industry, did CS at MIT, worked for three startups, whatever,
then they don’t have that powerful knowledge as part of their
evaluation set.

3. Market Size - There is a lot of talk about
“dip sh**” companies these days. Mostly by early stage investors
talking about getting smaller exits But whether you’re talking
with micro VCs, seed stage investors, or series A,B investors
they all want to believe that your company CAN be big one day.
They might want you to start lean. They might accept that a $50
million outcome will drive good returns given their small
investment size, low price of entry, etc.. But almost all VCs
care about investing in big markets with ambitious teams. So
NEVER talk about early exits, quick flips, tuck-in acquisitions,
previous interest shown by acquirers, etc., during your meeting.

4. Money - The final M is often misunderstood.
Most VCs you’ll want will want to be able to put a certain amount
of money to work and will want to own a large enough percentage
of your company to pay attention. There are modern investors who
think differently and are willing to invest $100k as part of a
$1.5 million round. But mostly when they do it’s just because
they consider you part of their early stage investment portfolio
where they’re less sensitive about ownership percentage. If
you “take off” they’ll likely want to own more. I acknowledge
that some investors have as their strategy to make lots of small
bets. It’s the exception rather than the rule.

We can have an intellectual debate about whether it is the right
investment strategy or not to have a minimum threshold. I’m only
here to tell you that it is the case and better that you know
going in. Most VCs want to own between 20-25 percent minimum of
your company. If they co-invest with somebody else that they
consider important they might be willing to cut that back to 15
percent. But most VCs won’t want to own 8 percent of your
company. If they do it’s likely because they want an option to
invest more later.

I’ve heard one prominent investor talking about how one of his
best returns he only owns 7-8 percent. But that’s because
it turned out to be a $2.5 billion company (and counting). So if
you turn out to be THAT then people will be happy with just 2
percent. But for the 99.9 percent of everybody else know
that VCs will likely allocate their time more to companies with
higher earning potential over time. Don’t shoot the messenger.
It just is.

And by the way, it’s OK to ask, “do you guys have a minimum
ownership level that you like to hit?” Doesn’t hurt to politely
get this out in the open.

BUT WAIT? All these “m’s” and you never spoke
about product? WTF? What about Product / IP? That’s not an
M? OK True. It’s a P. But to make the 4 things more
memorable (and thus all M’s) I had to wrap product up in
momentum, which is mostly based on product momentum. But to be
clear: investors care about management, markets, and products.
They invest in deals where they can own enough to make it worth
their time — thus “money.” And all of this is wrapped up in
forward progress that you demonstrate over time.